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Incentives for Diversification and the Structure of the Conglomerate Firm

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  • William J. Marshall
  • Jess B. Yawitz
  • Edward Greenberg

Abstract

In this paper, we examine the proposition that both the structures of conglomerate firms and their merger activities evidence a systematic attempt to diversify income sources and reduce the volatility of firms' profits. We test whether firms that are active in one line of business are more likely to be involved in another, the lower is the correlation between returns to the two activities, and whether, ceteris paribus, the likelihood of merger depends inversely on the correlation of cash flows to the principal activities of thecandidates for merger. We conclude that firms do act as if their goals include firm-level diversification.

Suggested Citation

  • William J. Marshall & Jess B. Yawitz & Edward Greenberg, 1984. "Incentives for Diversification and the Structure of the Conglomerate Firm," NBER Working Papers 1280, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1280
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    Cited by:

    1. Benjamin E. Hermalin and Michael L. Katz., 1994. "Corporate Diversification and Agency," Economics Working Papers 94-227, University of California at Berkeley.
    2. Mantell, Edmund H., 1998. "The effect on firm output after its acquisition by a pure conglomerate," Journal of Economic Behavior & Organization, Elsevier, vol. 36(4), pages 487-501, September.
    3. Cynthia A. Montgomery, 1994. "Corporate Diversificaton," Journal of Economic Perspectives, American Economic Association, vol. 8(3), pages 163-178, Summer.

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